Wednesday, March 18, 2009

The phony outrage over the AIG bonuses

All the outrage over the AIG bonuses rings so hollow. If the politicians had been so concerned about compensation for the AIG employees, they could have written controls into the bailout package. If Obama had been truly concerned, he wouldn't have installed one of the architects of the first bailout package for AIG as his indispensable Secretary of the Treasury. At the very least, Geithner could have looked into this issue before increasing the bailout for AIG a few weeks ago. And Obama could have had more of a care of what was going into the bailout in the first place rather than reacting once populist outrage reached huge scandal proportions. Wasn't the time before the bailouts the time when the government had the leverage to negotiate such measures?

The Democrats wouldn't have stripped out a bipartisan provision that Senators Snowe and Wyden put in the original proposal to tax bonuses for firms that accept government bailout funds. It would be interesting to find out who was the genius who stripped that provision out.

Chris Dodd is leaping all over himself to condemn AIG even though he'd originally proposed an amendment protecting compensation.
Republicans singled out a last-minute amendment attached to the $787 billion stimulus bill that exempted AIG from strict executive compensation limitations.

The final version of the amendment includes an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” — a provision that exempts the AIG bonuses Congress is now trying to recoup.

Dodd, the chairman of the Senate Banking Committee, sponsored the amendment, but his office said Tuesday that his original proposal did not include special treatment for AIG.
Can't you just picture the ads that will be run against the already endangered Chris Dodd next year? Republican ad makers must already be at their drawing boards picking out the most unappealing Dodd photos to juxtapose with some sinister music and pictures of shadowy AIG executives. Oh, and then they can add in the tidbit of how Dodd was the largest recipient of AIG donations. AIG is the new Enron with the difference being that the federal government is now tied up in the meltdown.

And Chuck Grassley displays the human touch calling for AIG leaders to commit suicide, thus echoing Congressman Lantos's hint to Craig Livingstone of the Clinton FBI files scandal that he follow Admiral Borda's example of killing himself when he'd made a mistake. What is it with these guys on the Hill that they think their honor is so pristine that they can recommend ritual seppuku to others?

Now every politician in DC is rushing to a microphone to condemn AIG in the most ringing tones. Where were they before when all this money was being shoveled over to AIG? And they're trying to craft a policy to tax those bonuses in order to regain the money. What is it about bills of attainder that they don't understand? As the WSJ wrote yesterday,
The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.
This is what happens when you have the government quickly putting together emergency provisions to bailout private companies. Once Secretary Paulson decided that AIG was too big to fail and that a bailout had to be put together in some godawful hurry, we were on the path to this moment.

Ruth Marcus offers
some words of reason.
Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical, but are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective.

In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government -- even when that is in the national interest. This is similarly counterproductive.

Remember, the contracts were negotiated long before the government put a cent into AIG. "The plan was implemented because there was a significant risk of departures among employees at (the company)," AIG wrote in a paper explaining the plan, "and given the $2.7 trillion of derivative positions at (the company) at that time, retention incentives appeared to be in the best interest of all of AIG's stakeholders."

And federal legislation explicitly states that compensation limits for companies receiving bailout funds do not apply to pre-existing contracts.

That was then, this is now is not a valid legal principle. "We are a country of law," economic adviser Lawrence Summers said Sunday. "There are contracts. The government cannot just abrogate contracts." He was right.
The politicians chose a federal bailout over a bankruptcy procedure. In a bankruptcy, there would have been provisions to renegotiate contracts that could have been used to avoid this moment. But we didn't do that. We went the bailout route. And now we're reaping the reward. And the politicians are the ones who voted for all this. The outrage that we're seeing is the result of those politicians realizing that they were at fault and they're desperately trying to cast the blame elsewhere.

UPDATE: And all this self-serving chest-beating bullying of AIG may be totally counterproductive to improving the economy. Andrew Ross Sorkin writes in the NYT,
If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue — but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)
If the AIG executives were the ones who helped get the economy into this mess, does the Geithner-Congress alliance give you any more confidence that they know how to fix things any better?